Discussions with the Kingdom of Saudi Arabia Government have been underway for some time to agree definitive pricing for the supply of 72 Typhoon aircraft to the Royal Saudi Air Force (RSAF) contracted in 2007 under the government to government Salam programme. Whilst progress has been made through the course of these negotiations, issues remain to be resolved before contract pricing, acceptable to all parties, can be agreed.

Discussions continue towards a Salam agreement. Acceptable pricing terms remain the Group's driver to such an agreement, not the timing of the settlement. Should an acceptable agreement not be reached before the Group's full year results announcement, the impact on 2012 trading guidance would be to reduce the Group's underlying earnings per share by approximately 3 pence per share.(The full-year announcement on scheduled for Feb. 21, 2013 – Ed.)

BAE Systems, as the prime contractor to the UK Government, has delivered 24 Typhoon aircraft to date. All parties remain committed to the programme and further aircraft are in-build for deliveries to recommence in 2013.

Further progress has been made on other aspects of the Group's business in the Kingdom of Saudi Arabia. Following the approval of budgets amounting to $12bn in December 2011, negotiation of contracts to provide the next five years of support together with supply of other related equipment under the core Saudi British Defence Cooperation Programme (SBDCP) are well advanced and are expected to be signed before the end of 2012. These contracts will allocate a significant proportion of the approved budgets.

These contracts under the SBDCP follow the £1.6bn award, in May 2012, to support the future aircrew training requirements of the RSAF. That contract includes the supply of 22 new Hawk Advanced Jet Trainer aircraft, 55 Pilatus PC-21 aircraft and other aircrew training equipment. (ends)

Saudi, Oman Contracts Continue to Slip

(Source: defense-aerospace.com; posted Dec. 20, 2012)

PARIS --- Talks on the follow-up sale of a second batch of Typhoons to Saudi Arabia have been dragging on since the first aircraft from the original order were delivered in 2009, but the Dec. 19 profits warning above – unusual in its length and detail - is the company’s most direct statement on the issue to date.

It is significant because it shows that, whereas BAE was previously so confident of signing the new business as to include the resulting profits in its forecast for the year, it now is so uncertain of it as to feel obligated to issue a profit warning just six working days before the end of the year.

In fact, Saudi Arabia’s much-anticipated second order for Eurofighter Typhoons has been expected since early 2009, and as shown below BAE’s statements on the issue have grown increasingly non-committal in light of continuing delays.

Expectations were last raised in November, when British Prime Minister David Cameron’s visit to the Middle East was hyped by British press reports who anticipated it would produce Typhoon orders from Saudi Arabia, Oman and the United Arab Emirates.

Much was made at the time of an agreement with the United Arab Emirates to “establish a defence industrial partnership that involves close collaboration around Typhoon and a number of new technologies,” as a joint UK/UAE communiqué dated Nov. 6 put it, but this has since been shown to have little substance.

And BAE is still waiting for Oman’s long-overdue order for 12 Typhoon aircraft, which was due to finally be signed during Queen Elizabeth’s visit to the country in November 2010, and which still remains very much up in the air.

However, Bloomberg reported Dec. 19 that signature of Oman’s contract to buy 12 Typhoons is “set to be announced Dec. 21 in Oman, said one person who asked not to be named because the plans are private. The deal is valued at more than $1 billion.”

On reason for the long delay may be that operating a single squadron of advanced fighters is prohibitively expensive, given training costs as well as the cost of ground equipment, support and an entirely new supply chain for just a dozen fighters.

As indicated previously, modest growth in underlying earnings per share is anticipated for 2012, assuming a satisfactory conclusion to the pricing negotiations this year with the Saudi Arabian government on the Typhoon Salam programme … A higher level of operating business cash inflow is planned for the Group in 2012 including the anticipated benefit of cash receipts related to the Salam programme(This was just two months ago—Ed.)

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In Saudi Arabia, following the award of a £1.6bn contract in May to support the Royal Saudi Air Force's future aircrew training requirements, BAE Systems has been awarded a six-month extension to the current aircraft support contract on the Typhoon Salam programme. Negotiations with the customer continue in respect of the Typhoon Salam programme for the next five years of support, the construction of maintenance and upgrade facilities in-Kingdom, and for capability enhancement.

Negotiations also continue on the Saudi British Defence Co-operation Programme for the next five years of support, including additional awards associated with the training environment and weapons procurement. These negotiations cover contracts worth in excess of £7bn.or about three years’ profits—Ed.)

Contract negotiations with the Omani Ministry of Defence for the supply of 12 Typhoon Tranche 3 aircraft and associated support are expected to be concluded this year.

As previously indicated, whilst little sales growth can be expected for the Group in 2012 in the current market conditions, modest growth in underlying earnings per share is anticipated, assuming a satisfactory conclusion to Salam negotiations in 2012 and excluding the benefit of the 2011 Research & Development tax settlement. A higher level of operating business cash inflow is planned for the Group in 2012 with the anticipated benefit of cash receipts related to the Salam programme.

In January, the Group provided an update relating to its Salam programme in the Kingdom of Saudi Arabia. This update included proposed changes relating to final assembly of the last 48 of the 72 Typhoon aircraft, the creation of a maintenance and upgrade facility, initial provisioning for subsequent insertion of Tranche 3 capability in respect of the last 24 aircraft of this order, and formalisation of price escalation.

Following budgets being approved in the Kingdom in December 2011 on all these items, other than the price escalation, contracts valued at £0.4bn have been received to date.

Salam trading relating to the formalisation of price escalation, including significant cash receipt, remains deferred until ongoing negotiations have been concluded.

Budgets were also established for the next five years of support on the core Saudi British Defence Co-operation Programme, including an upgrade of the training environment. Contract negotiations on these items are well advanced. …/…

In April, the Group submitted its proposal for the supply of 12 Typhoon Tranche 3 standard aircraft, together with five-year availability-based support, pilot and ground crew training, and facilities, to the Royal Air Force of Oman.

Delivery of the first 24 Typhoon aircraft to the Royal Saudi Air Force under the Salam programme has been completed. The Group remains in negotiations regarding changes to the programme and formalisation of price escalation. These are planned to be concluded by the end of the year.

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The Group continues in discussions regarding the possible sale of Typhoon aircraft to the Sultanate of Oman.

The Royal Saudi Air Force (RSAF) has commenced flying operations following the delivery of the first four of 72 Typhoon aircraft.

The governments of the Kingdom of Saudi Arabia and the United Kingdom have reached agreement on detailed arrangements under the Salam Support Solution that will provide support for operations for a three-year period. These arrangements will be operated through a full availability service contract with BAE Systems, the first of its kind for Typhoon. The contract also includes training in the United Kingdom for RSAF Typhoon pilots and Typhoon multi-skilled aircraft technicians.